FCO Performance and Finances - Foreign Affairs Committee Contents

Conclusions and recommendations

1.  We conclude that the FCO is one of the major departmental losers in the Spending Review, certainly compared to the MOD and DFID, although we note that the 'core FCO' function has to some degree been shielded from the full ferocity of the cuts falling on the overall 'FCO family' budget, with a greater share of the pain being borne by the other 'family' members, the British Council and the BBC World Service. While it is not realistic to suppose that the FCO can be insulated from the need to scale back its spending and activities, in the context of the spending cuts being imposed across the entire public sector, we have particular concerns about its Spending Review settlement. (Paragraph 24)

2.  We conclude that reductions in spending on the FCO, if they result in shortfalls in skilled personnel and technical support in key countries and regions, can have a serious effect in terms of the UK's relations with other countries, out of all proportion to the amounts of money involved, especially in relation to the UK's security and that of its Overseas Territories. It follows that cuts to the core FCO budget even of 10% may have a very damaging effect on the Department's ability to promote UK interests overseas, given that these will come on top of previous cuts to the FCO's budget in the very recent past, which our predecessor Committee described, as recently as March 2010, as "unacceptably disrupting and curtailing" the Department's work and representing a threat to its effectiveness. We further conclude that the Spending Review settlement will accentuate the regrettable long-term trend for the FCO to lose out relative to other departments and agencies in the allocation of government spending. (Paragraph 25)

3.  We conclude that the 25% and 16% real-terms cuts to the budgets of the British Council and BBC World Service respectively will pose severe challenges to those two organisations. We note the FCO's arguments for redressing the balance of spending between the core FCO and the rest of the FCO family, in favour of the former, but we share the concerns that are likely to be felt in both the British Council and the World Service about the implications of the decision. (Paragraph 26)

4.  We conclude that cuts of 50% in the FCO's capital spending will severely impact on the Department's estates management. As priority for the remaining money will quite rightly be given to much-needed improvements to overseas security, the likelihood is that 'routine' modernisation and upgrading to Embassy premises will largely be put on hold for the four years of the Spending Review period. (Paragraph 34)

5.  We further conclude that the target of raising about £50 million per year for the capital budget through selling existing buildings may be difficult to achieve, and may not secure savings in the long-term. This target may create an unwelcome incentive to sell historic or prestigious buildings which have a potential long-term value to the FCO greater than any immediate monetary benefit likely to accrue from their sale. (Paragraph 35)

6.  We recommend that the FCO, in its response to this Report, should supply us with a list of overseas properties which it proposes either to modernise or sell, updated to reflect the changed circumstances following the SR2010 settlement. (Paragraph 36)

7.  We conclude that the FCO's 'localisation' policy has brought benefits, but we do not believe that it is capable of indefinite extension. A further reduction in the opportunities for more junior UK-based staff to serve in overseas posts, and a consequent diminishing of experience and morale among FCO employees, will over time have a damaging effect on the quality of British diplomacy and the effectiveness of the FCO. (Paragraph 46)

8.  We recommend that in its response to this Report, the FCO should supply updated information on its localisation policy. This should include a list of all overseas Posts, giving in each case the ratio of UK-based staff to locally engaged staff as it (a) was five years ago, (b) is currently, and (c) is expected to be in any future years for which projections have been made. We further recommend that the FCO should explain how decisions to localise jobs are made in individual cases, and what steps are taken to ensure that these individual decisions reflect the FCO's overall strategic need to retain a suitably sized pool of staff with overseas experience. (Paragraph 47)

9.  We recommend that, in its response to this Report, the Government should supply us with an assessment of how the future development of the European External Action Service is likely to impact on the work of the UK's global network of Posts. We further recommend that the Government should reconfirm the undertaking given by the previous Government to our predecessor Committee in April 2010 that "the establishment of the EEAS will not lead to our Embassies being replaced with Union Delegations". (Paragraph 55)

10.  We conclude that the introduction of the Foreign Pricing Mechanism is a welcome step. However, we are concerned that the new mechanism does not make allowance for differential inflation rates and may leave the FCO's budgets prey to steep inflation in other countries. We recommend that the FCO keep the operation of the new system under close review, and that if differential exchange rates entail significant losses to its budget, it should seek to reopen negotiations with the Treasury over amending the FPM to include some degree of compensation for this. (Paragraph 60)

11.  We conclude that, while the Government's commitment to meet the long-standing international obligation to spend 0.7% of gross national income on Overseas Development Assistance is welcome, there is a danger that 'reclassification' provides a cover for meeting the 0.7% of GNI target without increasing the money actually spent on ODA. (Paragraph 68)

12.  We recommend that, in its response to this Report, the FCO should give us a detailed breakdown of items of Departmental expenditure which it is proposed to reclassify as ODA, indicating in each case why they were not previously so classified, and noting whether the OECD and DFID have approved the reclassification. (Paragraph 69)

13.  We conclude that the removal of the funding of peacekeeping operations from the FCO's baseline is a welcome development, one which will reduce the overall financial risks faced by the Department. We recommend that in its response to this Report, the FCO should supply a detailed breakdown of the FCO's latest allocation from the Conflict Pool and the uses to which it will be put; and that it should also supply us with its latest estimate of the extent to which the budget for peacekeeping operations will need to be 'topped up' from the Conflict Pool. (Paragraph 73)

14.  We conclude that the British Council faces great strain on its budget over the next four years. A 25% reduction over this period may well trigger some fundamental rethinking of the role and work of the Council. We appreciate that the Council, like other public-sector bodies, has had very little time to prepare its response to proposed reductions in expenditure. Nonetheless, we note that there was a lack of clarity from our British Council witnesses on the important issue of whether cuts would necessarily entail service reductions. It is difficult to conceive that some service reductions will not be necessary. We further conclude that the extent to which the British Council can maintain anything like its current levels of service and geographic coverage will depend on its ability to increase its income from commercial activity and partnership. That in turn will entail a difficult balancing act in which the Council must seek to maximise its income from the sale of English language teaching and other services, whilst not compromising over the pursuit of its primary purpose, to "build engagement and trust for the UK through the exchange of knowledge and ideas between people worldwide". (Paragraph 85)

15.  We recommend that in its response to this Report, the British Council should supply us with a report on the progress it has made towards developing a detailed strategy for implementing the overall 25% cut, including details of further staff reductions and of the measures it has taken to ensure that the British Council's unique 'brand' will not be damaged by this strategy. (Paragraph 86)

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Prepared 11 February 2011